Chapter 5

Competitive Rivalry and Competitive Dynamics

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 Learning Objectives

Studying this chapter should provide you with the strategic

management knowledge needed to:

1. Define competitors, competitive rivalry, competitive behavior, and

competitive dynamics.
2. Describe market commonality and resource similarity as the building blocks
of a competitor analysis.
3. Explain awareness, motivation, and ability as drivers of competitive
behavior.
4. Discuss factors affecting the likelihood a competitor will take competitive
actions.
5. Describe factors affecting the likelihood a competitor will respond to actions
taken by its competitors.
6. Explain competitive dynamics in slow-cycle, in fast-cycle, and in standard-
cycle markets.

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 Definitions

• Competitors:
– are firms operating in the same market, offering
similar products, and targeting similar customers.

• Competitive Rivalry:
– is the ongoing set of competitive actions and
responses occurring between competitors.
– influences an individual firm’s ability to gain and
sustain competitive advantages.

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 Definitions

• Competitive Behavior
– The set of competitive actions and competitive
responses the firm takes to build or defend its
competitive advantages and to improve its market
position.
• Multimarket Competition
– Firms competing against each other in several
product or geographic markets.
• Competitive Dynamics
– The total set of actions and responses taken by all
firms competing within a market.

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From Competition to Competitive Dynamics

Competitors Why?
To gain an advantageous
market position
Engage
in Competitive
rivalry
Competitive behavior
•Competitive actions
How? •Competitive responses
What Results?
What Results?

Competitive dynamics
Competitive actions and responses taken
by all firms competing in a market

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From Competition to Competitive Dynamics

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Competitive Rivalry’s Effect on Strategy

• Success of a strategy is determined by:

– the firm’s initial competitive actions.
– how well it anticipates competitors’ responses to
them.
– how well the firm anticipates and responds to its
competitors’ initial actions.
• Competitive rivalry:
– affects all types of strategies.
– has a dominant influence on the firm’s business-level
strategy or strategies.

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 A Model of Competitive Rivalry

• Firms are mutually interdependent when:

– a firm’s competitive actions have noticeable effects on
its competitors.
– a firm’s competitive actions elicit competitive
responses from its competitors.
– competitors feel each other’s actions and responses.
• Marketplace success is a function of both
individual strategies and the consequences of
their use.

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 A Model of Competitive Rivalry

Competitive Analysis Drivers of Competitive Behavior

• Market commonality • Awareness
• Resource similarity • Motivation
• Ability

Feedback
Competitive Rivalry
• Likelihood of attack
•First-mover benefits
Outcomes •Organizational size
• Market position •Quality
• Financial performance • Likelihood of response
•Type of competitive action
•Actor’s reputation
•Market dependence

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 A Model of Competitive Rivalry

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 Competitor Analysis

• Competitor analysis is used to help a firm

understand its competitors.
• The firm studies competitors’ future objectives,
current strategies, assumptions, and capabilities.
• With the analysis, a firm is better able to predict
competitors’ behaviors when forming its
competitive actions and responses.

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 Market Commonality

• Market commonality is concerned with the:

– number of markets with which a firm and a competitor
are jointly involved.
– degree of importance of the individual markets to
each competitor.
• Firms competing against one another in several
or many markets engage in multimarket
competition.
– A firm with greater multimarket contact is less likely to
initiate an attack, but more likely to more respond
aggressively when attacked.

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 Resource Similarity

• Resource similarity is:

– how comparable the firm’s tangible and intangible
resources are to a competitor’s in terms of both types
and amounts.
• Firms with similar types and amounts of
resources are likely to:
– have similar strengths and weaknesses.
– use similar strategies.
• Assessing resource similarity is difficult if critical
resources are intangible, rather than tangible.

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A Framework of Competitor Analysis

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 Drivers of Competitive Behavior

• Awareness is:
Awareness
– the extent to which competitors
recognize the degree of their
mutual interdependence that
results from:
• market commonality
• resource similarity

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Drivers of Competitive Behavior (cont’d)

Awareness
• Motivation concerns:
– the firm’s incentive to take
Motivation action or to respond to a
competitor’s attack
– relates to perceived gains
and losses

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Drivers of Competitive Behavior (cont’d)

Awareness
• Ability relates to:
– each firm’s resources
Motivation – the flexibility that these
resources provide
• Without available resources
Ability
the firm lacks the ability to:
– attack a competitor
– respond to the competitor’s
actions

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Drivers of Competitive Behavior (cont’d)

Awareness
• A firm is more likely to attack
the rival with whom it has low
Motivation market commonality than the
one with whom it competes in
multiple markets.
Ability • Given the strong competition
under market commonality, it is
Market likely that the attacked firm will
Commonality respond to its competitor’s
action in an effort to protect its
position in one or more
markets.

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Drivers of Competitive Behavior (cont’d)

Awareness

Motivation
• The greater the resource
imbalance between the acting firm
and competitors or potential
Ability responders, the greater will be the
delay in response by the firm with
a resource disadvantage.
Market
• When facing competitors with
Commonality greater resources or more
attractive market positions, firms
Resource should eventually respond, no
Dissimilarity matter how challenging the
response.
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 Competitive Rivalry

• Competitive Action
– A strategic or tactical action the firm takes to build or
defend its competitive advantages or improve its
market position.
• Competitive Response
– A strategic or tactical action the firm takes to counter
the effects of a competitor’s competitive action.

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 Strategic and Tactical Actions

• Strategic Action (or Response)

– A market-based move that involves a significant
commitment of organizational resources and is
difficult to implement and reverse.

• Tactical Action (or Response)

– A market-based move that is taken
to fine-tune a strategy:
• Usually involves fewer resources
• Is relatively easy to implement and reverse

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Factors Affecting Likelihood of Attack
• First movers allocate funds for:
First Mover
Incentives – product innovation and
development
– aggressive advertising
First Mover – advanced research and
A firm that takes an development
initial competitive action • First movers can gain:
in order to build or
defend its competitive – the loyalty of customers who may
become committed to the firm’s
advantages or to
goods or services
improve its market
position. – market share that can be difficult
for competitors to take during
future competitive rivalry

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Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Second mover responds to the
first mover’s competitive action,
typically through imitation. They:
Second Mover
Incentives – study customers’ reactions to
product innovations
– try to find any mistakes the first
mover made, and avoid them
– can avoid both the mistakes and
the huge spending of the first-
movers
– may develop more efficient
processes and technologies

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Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Late mover responds to a
competitive action only after
considerable time has elapsed
Second Mover
• Any success achieved will be slow
in coming and much less than that
Late Mover achieved by first and second
Incentives movers
• Late mover’s competitive action
allows it to earn only average
returns and delays its
understanding of how to create
value for customers

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Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Small firms are more likely to:
– launch competitive actions
Second Mover
– be quicker in doing so
• Small firms are perceived as:
Late Mover – nimble and flexible competitors
Incentives
– relying on speed and surprise to
defend competitive advantages or
Organizational develop new ones while engaged in
Size - Small competitive rivalry
– having the flexibility needed to
launch a greater variety of
competitive actions

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Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Large firms are likely to initiate
more competitive actions as well
Second Mover as strategic actions during a given
time period
• Large organizations commonly
Late Mover have the slack resources required
Incentives to launch a larger number of total
competitive actions
Organizational • Think and act big and we’ll get
Size - Large smaller. Think and act small and
we’ll get bigger.
Herb Kelleher
Former CEO, Southwest Airlines

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Factors Affecting Likelihood of Attack (cont’d)

First Mover
• Quality exists when the
Second Mover firm’s goods or services
meet or exceed customers’
expectations
Late Mover
Incentives • Product quality dimensions
include:
Organizational - performance - conformance
Size
- features - serviceability
- flexibility - aesthetics
Quality
(Product) - durability - perceived
quality
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Quality Dimensions of Goods and Services

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Factors Affecting Likelihood of Attack (cont’d)

First-Mover

Second Mover
• Service quality
Late Mover dimensions include:
Incentives – timeliness
– courtesy
Organizational
– consistency
Size
– convenience
Quality – completeness
(Product) – accuracy
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 Likelihood of Response

• Responses to a competitor’s action are taken

when the action:
– leads to better use of the competitor’s capabilities to
gain or produce stronger competitive advantages or
an improvement in its market position.
– damages the firm’s ability to use its capabilities to
create or maintain an advantage.
– makes the firm’s market position becomes less
defensible.

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 Factors Affecting Likelihood
of Response

• Firms study three other factors to predict how a

competitor is likely to respond to competitive
actions:
1. Type of competitive action
2. Actor’s reputation
3. Market dependence

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Factors Affecting Strategic Response
Type of • Strategic actions receive
Competitive strategic responses
Action – Strategic actions elicit fewer total
competitive responses.
– The time needed to implement
and assess a strategic action
delays competitor’s responses.
• Tactical responses are taken to
counter the effects of tactical
actions
– A competitor likely will respond
quickly to a tactical actions.

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Factors Affecting Strategic Response (cont’d)

Type of • An actor is the firm taking an

Competitive action or response.
Action
• Reputation is the positive or
Actor’s negative attribute ascribed
Reputation by one rival to another based
on past competitive behavior.
• The firm studies responses
that a competitor has taken
previously when attacked to
predict likely responses.

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Factors Affecting Strategic Response (cont’d)

Type of
Competitive
Action • Market dependence is the
extent to which a firm’s
Actor’s revenues or profits are
Reputation
derived from a particular
market.
Market
Dependence • Competitors with high market
dependence are likely to
respond strongly to attacks
threatening their market
position.

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Competitive Dynamics versus Rivalry

• Competitive Dynamics
– Ongoing actions and responses taking place
between all firms competing within a market
for advantageous positions.
• Competitive Rivalry
– Ongoing actions and responses taking place
between an individual firm and its
competitors for advantageous market
position.

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Competitive Dynamics versus Rivalry (cont’d)

• Competitive Rivalry (Individual firms)

– Market commonality and resource similarity
– Awareness, motivation and ability
– First mover incentives, size and quality

• Competitive Dynamics (All firms)

– Market speed (slow-cycle, fast-cycle, and standard-
cycle
– Effects of market speed on actions and responses of
all competitors in the market

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 Competitive Dynamics

Slow-cycle • Competitive advantages are

Markets shielded from imitation for
long periods of time and
imitation is costly.
• Competitive advantages are
sustainable in slow-cycle
markets.
• All firms concentrate on
competitive actions and
responses to protect, maintain
and extend proprietary
competitive advantage.

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Gradual Erosion of a Sustained Advantage

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 Competitive Dynamics (cont’d)

Slow-cycle
Markets • The firm’s competitive
advantages aren’t shielded
Fast-cycle from imitation.
Markets • Imitation happens rapidly and
is inexpensive.
• Competitive advantages are
not sustainable.
– Competitors use reverse
engineering to quickly imitate or
improve on the firm’s products.
• Non-proprietary technology is
diffused rapidly.

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Developing Temporary Advantages to Create
Sustained Advantage

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 Competitive Dynamics (cont’d)

Slow-cycle
Markets
• Moderate cost of imitation
may shield competitive
Fast-cycle advantages.
Markets
• Competitive advantages are
partially sustainable if their
Standard-cycle quality is continuously
Markets
upgraded.
• Firms:
– seek large market shares
– gain customer loyalty through
brand names
– carefully control operations

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